A sparse grid approach to balance sheet risk measurement

In this work, we present a numerical method based on a sparse grid approximation to compute the loss distribution of the balance sheet of a financial or an insurance company. We first describe, in a stylised way, the assets and liabilities dynamics that are used for the numerical estimation of the b...

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Bibliographic Details
Published in:arXiv.org 2018-11
Main Authors: Bénézet, Cyril, Bonnefoy, Jérémie, Chassagneux, Jean-François, Deng, Shuoqing, Camilo Garcia Trillos, Lenôtre, Lionel
Format: Article
Language:English
Subjects:
Balance sheets
Computer simulation
Liabilities
Mathematical models
Numerical analysis
Numerical methods
Portfolio management
Pricing
Risk
Risk management
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Summary:In this work, we present a numerical method based on a sparse grid approximation to compute the loss distribution of the balance sheet of a financial or an insurance company. We first describe, in a stylised way, the assets and liabilities dynamics that are used for the numerical estimation of the balance sheet distribution. For the pricing and hedging model, we chose a classical Black & Scholes model with a stochastic interest rate following a Hull & White model. The risk management model describing the evolution of the parameters of the pricing and hedging model is a Gaussian model. The new numerical method is compared with the traditional nested simulation approach. We review the convergence of both methods to estimate the risk indicators under consideration. Finally, we provide numerical results showing that the sparse grid approach is extremely competitive for models with moderate dimension.
ISSN:2331-8422
DOI:10.48550/arxiv.1811.08706